The Advantages and disadvantages of Corporations in Legal English
Legal English Innovation
The History of Corporations
Advantages and Disadvantages of a Corporation
The Future of Corporations
Quick Guide
Take our quiz here to test your knowledge.
Legal English Innovation
Listening Activity
Area of law: Company/Corporate Law
Section 5 – Advantages and Disadvantages of a Corporation
Listening task: Take notes and organize a presentation setting out the advantages and disadvantages of a corporation.
Timing: This listening is 3 minutes and 30 seconds long.
So, as I was saying, corporations enjoy many advantages over other business entities. However, the main advantage of corporations, and remember this, all those future risk takers among you, is that stockholders are not liable for corporate debts. This is the most important characteristic of a corporation. In contrast, in the case of sole proprietorships and partnerships, the owners are personally responsible for the debts of the business. If the assets of the sole proprietorship or partnership cannot satisfy the debt, creditors can go after each owner’s personal bank account, house, etc. to make up the difference. As we’ve seen, if a corporation runs out of funds, its owners are usually not liable.
The second benefit of corporations is self-employment tax savings. Earnings from a sole proprietorship are subject to self-employment taxes. With a corporation, only salaries (and not profits) are subject to such taxes.
The third advantage of a corporation is its continuous life. The life of a corporation, unlike that of a partnership or sole proprietorship, does not expire upon the death of its stockholders, directors or officers.
The fourth advantage is the fact that it’s easier for a corporation to raise money. A corporation has many avenues to raise capital. It can sell shares, and it can create new types of stock, with different voting or profit characteristics.
The fifth and last advantage is the ease of transfer. Ownership interests in a corporation may be sold to third parties without disturbing the continued operation of the business. The business of a sole proprietorship or partnership, on the other hand, cannot be sold whole; instead, each of its assets, licenses and permits must be individually transferred, and new bank accounts and tax identification numbers are required.
Right, let’s move on to the disadvantages. The first of these drawbacks is the higher cost.Corporations cost more to set up and run than a sole proprietorship or partnership. For example,there are the initial formation fees, filing fees and annual state.
The second disadvantage is the formal organization and the corporate formalities. A corporation can only be created by filing legal documents with the state. In addition, a corporation must adhere to technical formalities. These include holding board and shareholder meetings, recording minutes, having the board of directors approve major business transactions, and corporate record-keeping. If these formalities are not observed, the stockholders risk losing their personal liability protection. While observing corporate formalities is not difficult, it can be time consuming. This is not the case with either a sole proprietorship or a partnership, both of which can commence and operate without any formal organizing or operating procedures, not even a written agreement.
The third and final disadvantage is unemployment tax. A stockholder-employee of a corporation is required to pay unemployment insurance taxes on his or her salary, whereas a sole proprietor or partner is not.
Legal English Innovation
What are the advantages of a corporation?
1.
not liable for corporate debt
2.
self-employment tax savings
3.
continuous life
4.
easy to raise capital
5.
ease of transfer
What are the disadvantages of a corporation?
1.
higher cost
2.
corporate formalities
3.
unemployment tax
Legal English Innovation
Raise vs. Rise
to raise
To increase the level of some thing in a controlled manner
to rise
To increase the level of some thing in an uncontrolled manner
Synonyms and Antonyms
An advantage
A benefit
An upside
A disadvantage
A drawback
A downside
General Vocabulary
a sole proprietorship
a partnership
a legal entity
to get sued
to go after
a debt
a shortfall
to manage
double taxation
a board of directors
the day-to-day operations
a pass-through entity
a dividend
a profit
Corporate Numbers
There were 30 million businesses in the United States in 2019, according to the US Census Bureau.
30,000,000
Of these businesses, 5.9 million were corporations, which accounted for 56.2% of total business revenue.
5,900,000
The average lifespan of a publicly traded US company has been decreasing in recent years, from 67 years in the 1920s to just 15 years today, according to a study by the Yale School of Management.
The total revenue of US corporations in 2020 was $38.1 trillion, according to the US Bureau of Economic Analysis.
$38,100,000,000,000
The top 100 US corporations alone generated over $15 trillion in revenue in 2020.
$15,000,000,000,000+
Delaware is the most popular state for incorporation among US corporations due to its business-friendly laws. In 2020, 67.8% of Fortune 500 companies were incorporated in Delaware.
Legal English Innovation
Corporate Fact Sheet
The legal framework for corporations in the US is provided by state laws.
2.
Each state has its own corporate code, but Delaware is the most popular state for incorporation due to its business-friendly laws.
3.
US corporations are typically organized as either C corporations or S corporations. C corporations are subject to double taxation, while S corporations are pass-through entities that are taxed only once.
4.
US corporations are subject to regulation by various government agencies, including the Securities and Exchange Commission (SEC), the Internal Revenue Service (IRS), and the Environmental Protection Agency (EPA).
5.
The total revenue of US corporations was over $38 trillion in 2020, according to data from the US Bureau of Economic Analysis. The top 100 US corporations alone generated over $15 trillion in revenue.
About the Author
Eric Froiland
Eric is a legal English teacher from the United States and has been based out of Bogota, Colombia for the last 10 years. He is the owner and founder of Legal English Innovation SAS, which is recognized as the top legal English academy in Colombia and is an official Test of Legal English Skills (TOLES) examination center.
